Fuel Cost Stabilization April 1, 2020 Board of Directors Finance - - PDF document

1

Fuel Cost Stabilization

April 1, 2020 Board of Directors Finance Item #7

What is Fuel Hedging?

• Managed program to limit the volatility of

fuel pricing

• Purchase a series of diesel future

contracts that create greater price certainty

• Differs from prior hedging program which

paid for insurance against outsized price moves (cap)

2

2

Un-Hedged vs. Hedged

• No Hedging
• Wide Range of Possible Cost
• Green and Red Lines
• Maximum Risk Exposure
• High Budget Risk
• Hedging 90%
• Narrower Range of Expected Cost
• Green and Red Lines
• Managed Risk Exposure
• More Certain Future Costs

Existing Fuel Purchase Agreement

• OPIS price: 5 day average rack rate for No. 2

CARB Clear ULSD fuel

• Price differentials to the OPIS index are

based on location and delivery method

4

Fuel Supplier Samtrans Diesel OPIS

• $0.012

3

Adding a Fuel Hedge

• Net cost of fuel = Hedge Price + (OPIS –

1.2 cents) – Spot Price

5

Fuel Supplier Samtra ns

Diesel OPIS

• $0.012

Futures Market

Hedge Price Spot Price

Hedge Mechanics/Pricing

Price Increase Price Decrease Actual Supplier Cost ($/gal) $2.00 $1.00 Total Cost $300,000 $150,000 Forward Pricing (120,000 gal) Hedge Price $1.50/gal $1.50/gal Spot Price $2.00/gal $1.00/gal Realized Gain $0.50/gal ($0.50)/gal Realized Gain (Loss) $60,000 ($60,000) Net Fuel Cost $240,000 $210,000 $1.60/gal $1.40/gal

6

Budget Price $1.50 Fuel Demand 150,000 gal/month Hedge Ratio 80%

Key Assumptions

4

Potential Risks

• Basis risk – mismatch between OPIS

index and spot diesel prices

• Over-hedging – hedging more fuel than is

needed

7

Why Now?

8

• 50

100 150 200 250 300 350 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1/20/16 87 3/25/20 110

10 Year Diesel History 3/26/20

5

Next Steps

• Staff is recommending the board approve:

– Repealing the existing Fuel Hedge Policy most recently amended in 2015 via Resolution 2015-22. – Adopting a new Diesel Fuel Hedging Policy allowing the Agency to buy, sell, and trade Diesel Fuel Futures Contracts. – Authorizing the General Manager/CEO to

• pen a commodities futures account on behalf
• f the Agency to buy, sell, and trade Diesel

Fuel Futures Contracts.